September Outlook: Volatility Continues & End Q3 Weakness
By: Jeffrey A. Hirsch & Christopher Mistal
August 29, 2019
Last month we warned that the market was ripe for a seasonal pullback. Within days of our monthly missive late-July and early-August delivered their typical seasonal weakness, of course with a little help from the Fed, yield curve and hot-button geopolitics. At the risk of sounding like a broken record, we expect the market to continue to track the seasonal and 4-year election cycle patterns closely as it has all year long.
Our updated chart of Pre-Election Year Seasonal Patterns overlaid with 2019 to date highlights the amplitude of August 2019 price swings as well as how closely market price action this year has tracked the historical trend and pattern. This suggests 2019 will continue to move in synch with the seasonal moves depicted on the chart. 
[Pre-Election Year Seasonal Patterns CHART]
So we expect the market to move higher toward the July highs until the last week of the September, which is the treacherous Week After Q3 Triple Witching – down 23 of the last 29 years for the S&P 500. Then the market tends to have a downward bias until late October. 
The CME Group’s FedWatch Tool currently has the odds of a ¼ point rate cut at the next meeting on September 18 as a virtual lock at 95.8%. Many on The Street are secretly (or not so secretly) expecting a ½ point cut. Negative market reaction to only a ¼ point and perhaps some more ambiguous comments from Fed Chair Powell, could fall right in line with Q3 Triple Witching volatility, end-of-September seasonal weakness after quarterly expiration and institutional portfolio restructuring and window dressing.
Technically speaking, the market has settled into a range between 2815 and 2945 on the S&P 500. S&P 2815 is a support level we have been tracking for some time now that sits at the intraday high back on November 7, 2018 where the market failed last fall before the 20% correction ran its course to the Christmas Eve low. The good news is the 2815 has held here this time unlike the ~2700 level last fall.
[S&P 500 Technical Support/Resistance Chart]
The bad news or at least the technical case for no new highs is that the S&P has yet to clear the 2945 level, which was the intraday high on Friday August 2 that was the beginning of two back-to-back Down Friday/Down Mondays, which has a negative indication if not quickly reclaimed.
So look for the market to drift higher into mid-September with a struggle to break above 2945-2955 on the S&P, which is right at the 50-day moving average (DMA). If it can clear that level it may be able make a run at the highs before turning lower the last week of September. October could likely see a retest of 2815 with the 2725 support level that was held in June also being in play. Stick to the drill and wait for our Best Six Months Seasonal MACD Buy Signal before jumping back in with both feet.
Pulse of the Market
DJIA’s stretch at new all-time highs in July was brief and August lived up to its reputation as the worst month of the year since 1988. A tweet and the resulting decline on the first trading day of August set the tone for the rest of the month. DJIA quickly broke its 50-day moving average, but thus far support at the 200-day moving average has held (1). 
Slower and faster moving MACD indicators, that were confirming overbought conditions throughout much of July, rapidly turned negative in early August confirming the loss of positive momentum. Both MACD indicators were positive as of August 28 close (2). However, further strength is needed to truly confirm recent weakness is ending and will not spill over into September.
Dow Jones Industrials & MACD Chart
Early in August DJIA recorded its fifth and sixth Friday/Down Monday (DF/DM) occurrences of 2019 (3). New research into back-to-back DF/DM’s yielded similar results as a single DF/DM. There is a window in which if recovery from the losses is swift, then the likelihood of further declines begins to fade. But, if losses are not recovered quickly, then further weakness becomes likely. The window has closed and DJIA is not back to pre-DF/DM levels.
After four straight weeks of declines by DJIA, S&P 500 (4) and NASDAQ (5) a gain this week and next would not be all that surprising. Sentiment has soured and those that wanted out have likely already sold. The last four-week losing streak in May was followed by three straight weeks of gains, but that rally was driven mostly by the Fed signaling its willingness to cut rates which occurred at the Fed’s July meeting and is already widely expected at the next.  
Market breadth measured by NYSE Weekly Advancers and NYSE Weekly Decliners (6) has been in line with four straight weeks of losses. Weekly Decliners easily outnumbered Weekly Advancers throughout August. One potentially worrisome observation, or lack of, is the absence of at least one heavily lopsided week. May’s market retreat had one week (ending May 31) where Decliners outnumbered Advancers by over 3 to 1. At the December bottom the ratio was over 11 to 1. This week’s reprieve could be short-lived.
Weekly New Highs and Lows (7) exhibited odd behavior throughout August. New Highs actually peaked when DJIA, S&P 500 and NASDAQ all shed 2.6% or more during the week ending August 2. And New Highs expanded last week as the major indexes went lower. Strength in precious metals and in defensive, rate sensitive shares likely accounts for the somewhat unusual readings. Also noteworthy the peak of 603, was still lower than the previous peak of 621 recorded in the final week of January 2018.
When the Fed cut in July, the 30-year Treasury bond yield (8) started its race lower. Last week’s 2.06 reading is a record low and it slipped under 2.00 this week. Historically low rates have been a positive for stocks. However, in a world where rates in other countries are actually negative, 2.00 does seem somewhat high.
Click for larger graphic…
Pulse of the Market Table